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The Risks Of Being A Guarantor

Updated 19 Oct 2018 – By Loanstreet


Being a guarantor commonly materializes as a favor for a friend or family member rather than an investment opportunity. Truth is, it has a maximum downside potential with zero gain financially.

Financial institutions require guarantees to hedge their investment in case borrower defaults on regular repayments. This case highlights the lack of guarantor’s knowledge that they are legally responsible for the borrower.
If you’re a guarantor, read on.

1. What You Need To Know About Being A Guarantor?

A guarantor is bound to a legal contract stating your obligation to clear up debts in the event that the borrower defaults. It is crucial that a guarantor understands what this actually means! Preliminary steps such as seeking advice from your lawyer are encouraged to minimize risks if any, though legal fees are to be born yourself.

It is true that anyone can be a guarantor but a few legal requirements need to be met. These are the following:

  • 18 years old or above
  • Must not be in the state of bankruptcy
  • Must have the mental ability to fully understand the guarantee document
  • Must be willing to accept the conditions without peer pressure

Some protections are given to guarantors. If a guarantee misses out a payment, financial institutions do not have the right to carry out any action against the guarantor unless the guarantee demands it. Upon the last debt payment, a guarantor is released from his obligations.

2. What Are Your Rights And Liabilities?

Guarantors should be wary of their legal rights applicable to them before and after signing the contract. They are permitted to obtain a copy of the letter of guarantee and any other related documents as a proof of the agreement. In the case of any accusation, these documents can act as the gateway out.

It is also useful to acquire information on the outstanding balance of borrower’s account for keeping tabs on them. Bear in mind that even though they are individuals you trust, it never hurts to take extra precaution. The right for the information can be exercised with the borrower’s consent. If access is denied, that is when you should be more alert.

As mentioned before, there is only downside potential by being a guarantor. You won’t get a good credit record even if the borrower successfully pays off the loan but otherwise, bad credit ratings can limit future investments. If any doubts are experienced and you wish to terminate the guarantee agreement, you can exercise your right to call upon the borrower to pay off the loan to release all the liabilities but the terms and conditions may vary.

Any extent of liability of guarantor is specified in the document. Therefore, it is very crucial that guarantors are aware of what impacts they may sustain in the future.

3. What Are The Do’s And Don’ts?

The golden rule when it comes to any agreement is never sign a document that has not been clearly understood. The law does not accept any justification not incorporated in the document. Some individuals may feel obliged to be a guarantor for their family members but often overestimate their capability to assist. If in any case where you have doubts about the ability of the borrower or you yourself have no capacity to settle the debts if borrower defaults, you would be doing all parties a favor by not agreeing.

Before putting the ink onto paper, several details must be included to avoid opposition loopholes. A few that guarantor must take notice is the maximum amount to be guaranteed, terms and conditions of loan, signatures from all joint guarantors and obviously, the name of the borrower in case you accidently do someone else a favor.

4. Frequently Asked Question

Q : If the borrower approaches financial institution requesting increase in the loan amount, is the guarantor liable to the increased amount?

A : No. By legal rights, the additional amount requires a separate guarantee, assuming the financial institution grants this. If borrower again requests you for the guarantor, you have a choice to accept or decline.

Q : Will i be made into bankruptcy if the borrower failed to repay the loan?

A : Yes. If the debt is equal to or more than RM30,000 as defined by the Bankruptcy Act 1967, the financial institution can take bankruptcy action against you to recover the debt.

Conclusion

There are many ways a friendship can be disrupted and being a guarantor for your family member or a friend could be one of them. The gesture of assisting someone in need is definitely comprehensible but there is a limit to everything. Guarantors should know their capability before agreeing to any documents legally. So, it is wise to put in extra thought into this matter.

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